It’s been over a year since macroeconomic headwinds started wreaking havoc on venture capital. Late-stage startups were the first to feel the blow, but the impacts continued to creep lower as 2022 went on.
Now in 2023, it seems the uncertainty has made its way down to the seed stage — for some companies, at least.
Several seed investors have told TechCrunch+ they’ve seen a drop in outreach for seed deals and have seen valuations soften. But Q1 data from both PitchBook and Carta paints a slightly different picture: While Q1 was the slowest period for seed deals in 10 quarters, median and average deal sizes and median deal pre-money valuations were up compared to Q4 of 2022.
But there’s an issue with tracking seed-stage deals: The data is almost never complete because these figures only include information on priced rounds and don’t include SAFEs. Considering SAFEs seem to make up the majority, if not a significant portion, of these early-stage deals, we aren’t getting the full picture.
So what’s actually happening?
Loren Straub, a general partner at software-focused Bowery Capital, told TechCrunch+ that she’s seeing less quality deal flow and has noticed a meaningful change in valuations since the latter half of 2022.
She said that the majority of deals Bowery is looking at, or has closed so far this year, have been companies looking to raise between $2 million and $3 million, often at a pre-money valuation below $10 million. For context, the median pre-money valuation per Carta and PitchBook came in around $13 million.
“I think there has still been a fair number of companies fundraising at lower valuations, more than we were seeing in the past,” Straub said.
Kirby Winfield, the solo GP behind Ascend.VC, which backs pre-seed AI and machine learning startups based in the Pacific Northwest, has seen a noticeable 25% to 30% drop in valuations in the pre-seed deals he is seeing cross his desk. This could be a sign that there could be further softening in seed deals.
But these lower valuations aren’t widespread. While there will always be outliers — like SpaceX continuing to grow its valuation in a roiled late-stage market — this doesn’t seem to be a case of one-offs skewing the data.
A New York-based seed investor told me a few weeks ago that their firm had slowed down deployment quite a bit because they find themselves still passing on a lot of great companies because they were looking for lofty valuations the firm couldn’t justify.
Clearly, deals are still being closed at these elevated valuations, both through priced rounds that would be included in the data and otherwise.
One source of such deals is Y Combinator. Yes, demo day isn’t until April, but many companies raise rounds in Q1 and just look to top off their capital at the Q2 presentation.
While some investors chose to sit out demo day this year, saying the graduating startups were too pricey in today’s market, Straub said quite a few of the companies she spoke to before demo day were looking to raise SAFE rounds with lofty valuation caps and were landing investors.
But not all of them had such ambitions, and Straub added that she did think YC valuations had deflated compared to recent years.
It’d be unwise to overlook AI companies, which are likely driving up the numbers. This latest agent of FOMO is making investors forget everything they learned from getting burned by their recent overvalued bets.
So far this year, we’ve seen numerous AI companies capture large seed rounds. While many aren’t disclosing their valuations, the round sizes provide a pretty solid hint that it isn’t small and is likely pushing up those median numbers.
Product Science’s $19 million seed round to help companies make their mobile apps faster using AI, and Fixie’s $12 million seed raise to use AI to help automate large language models, are just two examples. Remember, while these rounds aren’t huge in the grand scheme of venture, the median seed deal size in Q1 was $3 million and the average was $4.7 million, according to PitchBook.
It isn’t only AI startups grabbing all the big rounds, either: Binske, a cannabis startup, raised an $80 million seed round; app authenticator startup Descope raised $53 million; and Carbonplace, a carbon credit transaction network, raised $45 million.
So even as many seed-stage deals are coming back down to earth, others seem determined to stay in 2021’s pricing stratosphere. This environment has made it hard for seed investors like Straub to help their companies set milestones they want to hit before going out to raise their Series A, because investors aren’t behaving consistently.
With no end in sight to this market slowdown, will the broader seed market come to a consensus on lower valuations? Or will we continue to see a divide in valuations setting the market up for lopsided growth in the future?